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Fitch Revises Outlook on Russia to Stable; Affirms at 'BBB-'
October 14, 2016 / 8:11 PM / a year ago

Fitch Revises Outlook on Russia to Stable; Affirms at 'BBB-'

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Russia - Rating Action Report here LONDON, October 14 (Fitch) Fitch Ratings has revised the Outlook on Russia's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to Stable from Negative and affirmed them at 'BBB-'. The issue ratings on Russia's senior unsecured foreign and local currency bonds have also been affirmed at 'BBB-'. The Country Ceiling has been affirmed at 'BBB-' and the Short-Term Foreign Currency and Local Currency IDRs at 'F3'. KEY RATING DRIVERS The revision of the Outlook on Russia's IDRs reflects the following key rating drivers and their relative weights: HIGH Russia has implemented a coherent and credible policy response to the sharp fall in oil prices. A flexible exchange rate, inflation targeting, fiscal consolidation and financial sector support have allowed the economy to adjust and domestic confidence to return gradually. The strength and quality of the policy response stands out relative to those of other oil producers similarly affected by the oil price shock. MEDIUM International reserves have climbed by 8% over the first nine months of 2016 and are forecast to rise throughout the forecast period, after declining in late 2014 and most of 2015. This will lift coverage of current external payments to 13.3 months; more than double the peer median. External adjustment has been underpinned by a flexible exchange rate, which has kept the current account in surplus, and a reduction in capital outflows. The current account surplus is forecast to narrow to 2.3% of GDP in 2016 (the 'BBB' median is a deficit of 1.8% of GDP), from 5.2% of GDP in 2015, due to lower oil prices. Fitch expects the surplus to rise modestly over the forecast period, as the unleashing of pent-up demand for imports will largely offset the impact of rising oil prices. Capital outflows are expected to fall, reflecting an easier external debt repayment schedule and greater confidence in the domestic economy. Deleveraging by banks and corporates is forecast to have doubled the size of the net external creditor position to 32.6% of GDP at end-2016, from 15.8% at end-2014, and compared with a peer median net debtor position of 1.9% of GDP. The external debt repayment schedule is less onerous over the forecast period than in 2014 and 2015, so the pace of deleveraging will slow. The sovereign demonstrated market access in May and September and occasional issuance is expected over Fitch's forecast period to end-2018. A medium-term fiscal strategy is taking shape that will lower the general government deficit. A nominal spending freeze is planned, combined with revenue raising measures focussed on increasing tax compliance and SOE dividends and higher excise taxes, and based on an oil price of USD40/b. Fitch is cautious about the potential savings and additional revenues, but does expect continued consolidation and, based on our higher oil price forecast, we project a decline in the general government deficit to 1.5% of GDP in 2018 from 4% in 2016. Fitch expects Russia's public finances to remain strong versus 'BBB' peers, despite the execution risks to the fiscal consolidation strategy. Inflation is above the 'BBB' median, but is falling as the inflation targeting regime gains traction. High real interest rates and a benign external environment pulled inflation down to 6.4% in September, from 12.9% at end-2015. A further decline in inflation is forecast, although hitting the 4% target by end-2017 is likely to be tough. The central bank is addressing inflation risks stemming from excess liquidity in the banking sector through deposit auctions and a hike in the reserve requirement. Russia's 'BBB-' IDRs also reflect the following key rating drivers:- Fiscal buffers are weakening, but remain strong relative to the peer group and are a key support for the investment grade rating. Fitch expects that deficit financing will exhaust the Reserve Fund in 2017 and a subsequent erosion of the National Wealth Fund. Debt financing will be stepped up, but from a low base. Net general government debt is forecast at 9.4% of GDP at end 2018, compared with a projected 'BBB' median of 33.8%. The economy is recovering, but growth is forecast to remain weak, at 1.3% in 2017 and 2% in 2018, after an expected contraction of 0.5% in 2016. Private consumption will drive growth, reflecting greater confidence in the economic environment, rising real wages and a revival in credit growth. Investment should also make a positive contribution after a prolonged fall. Tight fiscal and monetary policies provide medium-term headwinds and unless long-term structural rigidities are addressed potential growth will stay around 1.5%, well below the peer median. The ruling United Russia party strengthened its presence in parliament at elections held on 18 September. The polls passed smoothly, with no repeat of the demonstrations that followed the 2011 election. All other parties represented in parliament broadly support the president. Presidential elections are due by March 2018. Russia's ranking in the World Bank governance indicators is well below the peer median. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Russia a score equivalent to a rating of 'BBB-' on the Long-Term FC IDR scale. Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The main factors that could, individually or collectively, lead to negative rating action, are: -A weakening of the policy framework that undermines macroeconomic and fiscal performance. -A sharp decline in international reserves. -A rise in geopolitical tensions or imposition of significantly tougher sanctions. The main factors that could, individually or collectively, lead to positive rating action, are: -The rebuilding of fiscal and external savings buffers, for example through a sustained recovery in oil prices. -Fiscal reforms and commitment to a credible medium-term fiscal framework. -Implementation of structural reforms that would boost potential growth. KEY ASSUMPTIONS Fitch assumes that EU and US sanctions remain in place over the medium term, but are not tightened significantly. Fitch forecasts Brent crude to average USD42/b in 2016, USD45/b in 2017 and USD55/b in 2018. Contact: Primary Analyst Paul Gamble Senior Director +44 20 3530 1623 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Charles Seville Senior Director +1 212 908 0277 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=986153 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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